Ringo Rag Executive Summary

Topics: Inventory, Cost accounting, Grade Pages: 4 (1647 words) Published: June 26, 2014

I. Situation Summary

The Ringo Rag Company ( Ringo ) purchases rags from multiple sources and recycles them into smaller clean handy rags in a continuous process. Ringo s obtains its raw materials from three suppliers: junk dealers, textile convertors, and laundries. Ringo uses a standardized manufacturing process for the old rags that includes washing and drying, inspecting and grading, cutting, and packaging. Although Ringo uses a standardized manufacturing process, rags obtained from the laundries forego the washing and drying process. Additionally, Ringo only cuts and packages rags obtained from textile convertors because they come cleaned and graded. The new rags receive one of three grades, A, B, or C, with A being the best grade, based on the rags absorption ability. Ringo packages them according to their grade into 5, 10, 20 and 50-pound cartons.

The purpose of this report is to analyze the cost of manufacturing three different grades of rags from three different suppliers. This report will analyze the different manufacturing costs associated with each supplier. Additionally, the report will discuss various issues Ringo faces in determining its actual manufacturing cost. Finally, the report will provide multiple recommendations that Ringo can implement to increase profits.

II. Core Problems

A. Sales Mix
Ringo cannot properly price its cartons because Ringo only tracks monthly sales by grade as opposed to tracking the percent of sales by carton size. Without tracking the percentage of sales of the 5lb, 10lb, 20lb, and 50lb cartons, Ringo is unable to calculate the sales dollars per pound and the contribution margin by product. For example, the 5lb cartons have a higher contribution margin than the larger size cartons. (See Exhibit I) Thus, if Ringo sells more 5lb cartons, they will increase their net sales and profits. Without knowing the percentage of sales based on carton size, Ringo is cannot properly...
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